How much would it cost to eliminate the at-risk-of-poverty rate? Evidence from the European Union

Abstract

The aim of this paper is to assess the cost of eliminating the at-risk-of-poverty rate, based on the Lorenz curve approach (the Gini coefficient, the Kakwani progressivity coefficient). A set of new equations that allow to find a link between cost of closing the relative poverty gap and income inequality is proposed. The main finding is that, after the initial allocation of social benefits, the share of benefits that are still needed to close the relative poverty gap in the pre-government income is a function not only of the at-risk-of-poverty rate, but also of the relative poverty line, the Gini coefficient of income of the poor, and the Kakwani progressivity coefficient of extra benefits. The empirical application of the methodology adopted is illustrated with the use of EU household sample (the data is derived from the EU-Survey on Income and Living Conditions). In line with the suggested decomposition, in the research sample ranking countries according to the at-risk-of-poverty rate does not coincide with the way they are sorted by the share of extra benefits.